Precious metals stocks took flight Thursday, even as the rest of the market struggled. The relative strength began immediately after the opening bell as buyers swarmed to capitalize on the gap lower. It is the type of outperformance that demands a spotlight and further investigation.
One of the bullish themes behind the recent market pullback has been its rotational nature. Instead of seeing distribution destroy every sector, we have seen a much more discriminating downturn. The tech sector has born the brunt of the damage. It entered the correction red-hot and overbought.
By contrast, precious metal stocks have been mostly untouched over the past week. Rather than fleeing equities altogether, traders have merely rotated from one industry to another. And there is no denying metal stocks have been one area seeing inflows.
Here are my favorite picks in the sector:
All three were ripping higher Thursday and boast compelling bullish chart patterns. After taking a closer look at their charts, I will suggest my preferred options strategy for capitalizing.
Precious Metals Stocks: United States Steel (X)
United States Steel was the top dog in the industry on Thursday. Its 8% surge outpaced all other stocks in the space, making it a must-include in this gallery. Big boys were backing the buying binge and jammed volume past 22 million shares on the session. The momentum allowed X stock to finally clear $8.20, which has been an overhead resistance zone for months.
In addition, we also returned to the 200-day moving average, and are blasting above it Friday morning. The next major ceiling is the June pivot of $11, so consider that the eventual target. I have two trade ideas to capitalize.
First, X is cheap enough to make a straight stock purchase feasible. If you want the simple approach, then buy shares.
Second, if you want to increase your odds of success you could sell the Oct $8 puts for around 33 cents. It offers an extremely attractive return on investment due to the low margin required. If the stock stays above $8 you’ll capture the $33 profit per contract.
Nucor has one of the more developed recoveries among precious metal stocks. It has almost doubled off the March low and has pushed past its 200-day moving average. The 20-day and 50-day are both rising in support and confirmation of its short-term and intermediate-term uptrends.
NUE stock cashed in on Thursday’s rotation, rising 3% on above-average volume. Prices cleared the $48 resistance pivot, officially sending Nucor to a fresh seven-month high. This comes, mind you, while the rest of the market is struggling at support.
If you think the breakout is an omen of things to come, new bull trades are worth a shot here. Implied volatility is low at 15%, making long call spreads an attractive play.
The Trade: Buy the Nov $50/$52.50 bull call spread for around 98 cents.
Precious Metals Stocks: S&P Metals & Mining ETF (XME)
For our final trade in precious metals stocks, we are taking the more diversified route. The S&P Metals & Mining ETF allows us to make a play on the entire industry instead of picking an individual company. Its flight path has followed that of Nucor, so the uptrend is well-established and pushing to new multi-month highs.
Yesterday’s jump brought XME to the brink of a breakout, and we are seeing resistance give way Friday morning. Like the X stock commentary, I think you have two ways to play here.
The $26 price tag makes buying stock a viable choice.
Or, you could amp up the leverage with a call spread. I prefer bull call diagonals like this one: Buy the Nov $25 call while selling the Oct $27 call for around $1.60.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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